Energy Law
why and how do we do ratemaking?
(1) capital attraction (2) reasonably priced electricity (3) efficiency incentive (4) demand control or consumer rationing (5) income transfer
3 goals of market regulation
(1) maximize administrative efficiency (2) minimize political controversy (3) serve & protect the public interest (Munn v. Illinois)
Procedure for Approval of a Tariff
(1) notice of intent to file (2) initial filing of proposed tariff (3) discovery (4) filing by all potential intervenors (5) hearing (6) filing of briefs (7) commission decision
5 attributes of perfectly competitive markets
(1) numerous buyers and sellers (2) product homogeneity (3) large enough quantity of goods so that no single buyer or seller has market power (4) perfect product info (5) freedom of entry and exit from the market place
fixed cost
For purposes of regulation, all utility costs are variable in the long-run. Even the costs associated with seemingly fixed assets, such as the distribution system, are not fixed, even in the short-run. Utilities are constantly upgrading and replacing distribution facilities throughout their system as more customers are served and customer usage increases, and efforts to reduce demand can have immediate impacts on those costs.
FERC
US federal agency that has jurisdiction over interstate transmission systems and wholesales of electricity.
retail competition
a restructured market where customers are allowed to or must choose their own competitive supplier of generation and transmission services. in most states with this, the incumbent utility or some other identified entity is designed as a default provider for customers who do not choose another supplier
throughput incentive
if a utility can serve increased usage with existing facilities and if current fuel and operating costs (the costs to produce and deliver another kWh with the existing power plants and distribution facilities) are lower than the retail rates, increased sale will increase profits in the short run.
Positive statement
statement of facts with basic economic principles
normative statement
statement of how economy should be with values
public utility commission
the state regulatory body that determines rates for regulated utilities
regulatory commission
● Independent agency under the executive branch (either the state governor or the U.S. President) charged by an enabling statute w/ controlling the activities of electric utilities. ● Creature of Congress (FERC) or State legislature that has quasi-legislative and quasi-judicial functions concerning specific areas of regulation as defined in its enabling statute ● Most state commissions consist of three to seven appointed or elected commissioners by the governor (most of the time) and a professional staff ○ Executive director is highest career position → serves at the pleasure of the commissioners ○ Director division of ratepayer advocates serves directly to governor, NOT to commissioners
regulatory compact
-an agreement between regulators and private franchises -the government gives the utilities a monopoly (limits/barriers to entry into the market, price setting power, service obligations, profit setting) -in exchange, the utilities five the people universal, non-discriminatory service at a just and reasonable cost & rate of return (non-discriminatory, just, and reasonable)
How are wholesale rates determined (2)
-contracts between utilities or between utilities and customers -by regulatory provisions of the Federal Power Act -Capacity auctions operate in a stack . Let's say we need 15 MW. Generator A (doesn't matter what kind, say ng) says it can produce 5 MW at $.10, Generator B says it can do 8 MW at $.12, and then Generator C says it can do 2 MW at $.15. Generator D says it can do 3 MW at $.20, but too bad, the 15 MW was reached so it doesn't clear auction. Generators A,B, and C, however, each get paid @ $.15, because that is the clearing price.
reasons we have monopoly franchises
-cost minimization: due to its capital intensity, energy production lends itself to large economies of scale and high market entry costs -tends to be most efficient per unit of electricity produced for a geographic area to have one provider (natural monopoly) -regulatory compact -public interest
examples of ways utilities serve the public interest
-universal service -adhere to government safety standards (minimize impacts on communities from sagging wires, ruptured pipes and other problems) -protect the environment and public health
benefits from EE
-utility system benefits -participant benefits -societal benefits
Meter data management system
A computer and control system that gathers metering information from smart meters, makes it available to the utility and, optionally, to the customer. A meter data management system is part of the suite of smart technologies and is integral to the smart grid concept.
renewable energy zones
A geographic area designated by legislative or regulatory process for concentrated development of renewable energy, typically wind or geothermal. This geographic concentration allows for efficient development of required transmission lines to connect the zone to the load centers where the power will be consumed.
critical peak pricing
A rate design in which a limited number of hours or other periods of the year are declared by the utility, usually on a day-ahead basis, to be critical peak demand periods or when system reliability is at risk owing to generation or transmission equipment failures and during which prices charged to the customer will be extraordinarily high. The purpose is to reduce demand during the small number of hours of the year when the generation costs are at their highest.
Energy Efficiency Resource Standard/Portfolio Standard
A state requirement that utilities meet a defined portion of their future requirements through the use of energy efficiency, or a specified mix of energy resources. The obligation can be expressed as a percentage of total consumption, a percentage of annual revenues, a percentage of load growth, or more flexible standards such as "all cost-effective" energy efficiency.
Fuel and Purchased Power Adjustment Clause/
An adjustment mechanism that allows utilities to recover all or part of the variation in the cost of fuel and or purchased power from the levels assumed in general rate case.
regional transmission organization
An independent regional transmission operator and service provider established by FERC or that meets FERC's RTO criteria, including those related to independence and market size. RTOs control and manage the high-voltage flow of electricity over an area generally larger than the typical power company's service territory.
Distributed Generation
Any electricity generator located at or near customer loads. This generation system usually refers to customer-sited generation, such as solar photovoltaic systems, but may include utility-owned generation placed within the distribution system.
Externalities
Costs or benefits that are side-effects of economic activities and are not reflected in the booked costs of the utility. Envi impacts are the principle X.
Public Utility Regulatory Policies Act of 1978 (PUPRA)
Deregulation aimed at stepping away from the vertically integrated model. enabled non-utility generators (NUGs) to sell power.
dynamic pricing
Dynamic pricing creates changing prices for electricity that reflect actual wholesale electric market conditions. Examples of dynamic pricing include critical period pricing and real-time rates.
elasticity
Elastic prices are those that respond with a greater percentage decrease in demand for a corresponding increase in price. Inelastic prices are when producers can raise prices without the corresponding decrease in demand. Low income - less able to alter usage (demand is more inelastic) High income - more able to alter usage (more elastic)
how are various forms of energy produced and delivered for consumption
Energy provides 3 different things - work, service, consumption.
Transmission
Series of high voltage lines transmit electricity through the national power grid. A whole sale transaction is one between 2 entities who are not the ultimate users of the electricity. FERC regulates wholesale sales
marginal cost
Short-run marginal costs are the incremental expenses associated with increasing output with existing facilities. Long-run marginal costs are the incremental capital and operating expenses associated with increasing output over time with an optimal mix of assets. Total System Long-Run Incremental Costs are the costs of building a new system in its entirety, a measure used to determine if an existing utility system is economical.
Energy efficiency
The deployment of end-use appliances that achieve the same or greater end-use value while reducing the energy required to achieve that result. Higher efficiency boilers and air conditioners, increased building insulation, more efficient lighting, and higher energy rated windows are all examples of energy efficiency. Implies a semi permanent, longer-term reduction in the use of energy by the customer, contrasted with behavioral programs that may influence short-term usage habits.
Evaluation, measurement and verification
The process by which the utility or regulator examines the actual results of energy efficiency programs, to determine the level of savings that are being achieved and the actual cost of the savings. This is normally a part of all energy efficiency programs, and is particularly important as a component of performance-based regulation.
inclining block rate
a form of rate design in which blocks of energy usage have increasing prices as the amount of usage increases. They reflect the fact that increased costs are associated with greater usage. -enhance the economics of energy efficiency and renewables by increasing the savings a customer can achieve by reducing energy purchases from the utility.
microgrid
a localized grouping of electricity sources and loads that normally operates connected to and synchronous with the traditional centralized grid, but can disconnect and function autonomously as physical and or economic conditions dictate.
tariffed rate
a price a utility attaches to a unit of energy consumed which has been considered and ultimately approved by the regulatory commission
energy charge
a price component based on energy consumer - typically expressed in $ kWh
trackers
a rate schedule provision giving the utility company the ability to change its rates at different points in time, to recognize changes in specific costs of service items without the usual suspension period of rate filing
distribution energy management system
a system of control and communication allowing one or multiple parties to utilize one or more distributed energy resources to supply energy, capacity, or ancillary services to a customer, the distribution system, or a bulk power system.
Open-access transmission tariff
by federal law, the transmission system is accessible to any generator that wants to use it
economies of scale
due to its capital intensity, energy production lends itself to: large economies of scale (which are declining Marginal Cost of producing additional units of electricity) and high market entry costs Most efficient per unit of electricity produced for a geographic area to have one provider (natural monopoly)
off-peak
during this time, system costs are generally lower and system reliability is not an issue. TOU rates have off-peak prices that are lower than on-peak prices
supply & demand
energy consumption is governed by the law of demand (as prices increase, consumers demand and use less of it). Profits are maximized (in a perfectly competitive market) when MR from selling an additional unit = Marginal Cost of producing that additional unit
What role does energy play in our society?
energy produces electricity necessary to power 5 sectors. Each sector consumers primary (fuel input) energy and secondary energy (electricity produced from fuel input).
operating expenses
expenses which are directly associated with providing service (labor, power purchases, outside consultants, attorneys) -they vary and are unpredictable
fixed charge
fee that does not vary with consumption
decoupling/revenue regulation
fixes the amount of revenue to be collected and allows the price charged to float up or down between rate cases to compensate for variations in sales volume in order to maintain the set revenue level
Energy production and delivery
generation -> transmission -> utility -> distribution -> consumption
Peaking resource
generation that is used to serve load during periods of high demand
peak time rebates
give money back if you demonstrate you reduced your use during a peak time
time variable rates (TVR)
how steep, what periods, is it a charge/credit, and do we make exceptions for particular customer classes
Integrated Resource Plan
long term plan/guide of utilities for future energy efficiency, generation, transmission, and distribution investments that draws in public to shift supply and demand for sources of power used by utilities
NERC
oversees electric utility reliability standards -self-regulating organization subject to oversight by FERC and governmental authorities in Canada
Wholesale/Generation
power is first generated by steam or hydro power at a plant step up - power is ramped up to a high voltage for long distance transmission -regulated by FERC
bundled service
power supply plus distribution
Diminishing marginal utility
the S curve - value initially increases at an increasing rate with quantity consumed. Then value starts to increase at a decreasing rate
long-run marginal costs
the long-run costs of the next unit of electricity produced, including the cost of a new power plant, additional transmission and distribution, reserves, marginal losses and administrative and environmental costs
Peak demand
the max. demand by a single customer. a group of customers located on a particular electric system or all the customer in a class or all of a utility's customers during a specific period of time
system benefit charge
typically structured so that utilities collect a surcharge on all sales of electricity or natural gas -> goes into a separate account & the utility makes expenditures from that to support consumer EE programs
Averch-Johnson Effect
utility increases profits by increasing its rate base, and that additional investments in the rate base are justified by and require additional sales - so there is also an incentive to increase usage
critical period pricing
when customers are asked to cut back on usage during limited times (during dynamic pricing)
the duck curve
○ With EE and renewables → the curve will progressively become steeper from the middle of the day to the end of the day (because we will need less and less energy during the day as we use more and more solar energy) ○ This creates an "overgeneration" risk during the day (because must increase energy provided quicker and quicker later in the day to meet the progressively steeper curve)
on-peak
-customer demand is the highest -system costs are higher -greater chance of reliability issues -many rate designs and utility programs are oriented to reducing on peak usage
used and useful review
A determination on whether investment in utility infrastructure may be recovered in rate base, such that new rates will enable the utility to recover those costs in the future when that plant will be providing service (i.e., when it will be used and useful). In general, "used" means that the facility is actually providing service, and "useful" means that without the facility, either costs would be higher or the quality of service would be lower.
Public v. Private goods
Common goods don't really exist anymore - electricity service is now a mixture of both because pollution (tragedy of the commons) and there is a private price of purchasing electricity
Rate design
Specification of prices for each component of a rate schedule for each class of customers, which are calculated to produce the revenue requirement allocated to the class. In simple terms, prices are equal to revenues divided by billing units, based on historical or assumed usage levels. Total costs are allocated across the different price components such as customer charges, energy charges, and demand charges, and each price component is then set at the level required to generate sufficient revenues to cover those costs
effect of TOU pricing based on elasticity of demand
TOU pricing adversely impacts low-income customers, as their elasticity of demand is lower (can't shut off their only AC unit) than that of high-income customers (who can shut off one of three AC units) => Can make exceptions for these customers
price risk management
Techniques and strategies designed to protect a customer from experiencing unexpected or undesired increases in price. This may involve the use of financial techniques, primarily the use of financial derivatives (options and calls), or may involve the use of alternative technologies, such as energy storage or backup generation, or changes to the manner in which the customer uses energy, such as load management and manufacturing process changes.
Why do we regulate electricity?
Without government intervention, markets wouldn't exist (such as in sparse areas where it wouldn't be profitable to electrify if not for regulation to force it) -public interest -minimize cost -address market failures (ensure that prices and quantities in natural monopolistic markets approximate those of a competitive market (MR=MC) -to make markets more competitive
Distribution-Only Utility
a utility that owns and operates only the distribution system. it may provide bundled service to customers by purchasing all needed energy from one or more other suppliers, or may require that customers make separate arrangements for energy supply.
Generation
any equipment or device that supplies energy to the electric system (usually classified by fuel source)
performance based regulation
any form of alternative regulation that ties company earnings to performance on metrics set by the regulator, rather than to strict cost-recovery of invested capital and operating expenses
advanced metering infrastructure
consists of smart meters to measure usage and meter data management systems to make data useful. These systems allow them to measure usage in very short intervals by time of day and to communicate info to and from the customer -used to determine peak load management -energy efficiency measures (conservation voltage regulation)
Electric Cooperative
consumer-owned utilities that are owned by the electric consumer members. They are controlled by a member-elected board, which includes business customers. Some coops are regulated by state utility commissions, and some are not. Most co-ops were formed in the years following the Great Depression, to extend electric service to remote areas that investor-owned utilities were unwilling to serve; there are also some urban cooperatives.
RTO and ISO
created voluntarily by utilities through FERCs recommendation, oversee transmission operations over a specified geographic area to ensure reliability of the system
different types of rates
customer charge stays the same, volumetric charge changes with use - flat: same price per unit no matter how much is used - inclining: if you use more, the rate goes up (progressive, bigger burden on rich) - declining: if you use more, the rate foes down (regressive, bigger burden poor)
peak time rebate
customer is given a discount if load is reduced at the critical peak time. rebate structures may be seen as less punitive for customers who have no means for reducing their on-peak usage.
Prudence reviews
determine if new facility was chosen & built in an economic fashion. if planning or construction is deemed imprudent, commission may disallow a portion of the investment, refusing to include it in the rate base
unbundled service
in restructured states, most utilities provide only distribution - this allows users to purchase power in the wholesale market directly from competitive suppliers and t pay the utility only for delivering that power
integrated resource planning
process by which many different energy resource options (on both the supply and demand side) could be evaluated in an integrated fashion to arrive at the plan with the least overall cost -by looking ahead through a planning process in which all stakeholders could participate and in which all life cycle costs could be evaluated, they could expose large, unproductive or uneconomic investments and reveal the most economic path forward
adjustment clause
rate adjustment mechanism implemented on a recurring and ongoing basis to recover changes in expense or capital expenditures that occur between rate cases
rate base formula
rate base investment x rate of return + operating expenses = revenue requirement
net metering
rate that charges customers who have onsite generation only for the "net consumption, measured by substracting the power supplied to the grid from the amount delivered to the customer by the utility -allows customers to spin meter backwards because of renewable energy they produce on their property
demand response
reduction in energy use in response to either system reliability concerns or increased prices (where wholesale markets are involved) or generation costs (in the case of vertically integrated utilities). Demand response must generally be measurable and controllable to participate in wholesale markets or be relied upon by system operators.
structure of utility industry
regulators, utilities, customers, suppliers/generators, transmission organizations, holding companies & investors
gradualism
regulatory technique used to avoid large and sudden changes in prices for consumers
restructured state/market
replacement of the traditional vertically integrated electric utility with some form of competitive market. the generation and transmission components of service are purchased by the customer-serving distribution utility in a wholesale competitive market
rate of return
return a utility may recover on its investment in these assets what level above cost of $ is necessary to attract investment
residential demand charges
specific demand charges that can be limited based on a number of factors (in the residential sector). If the demand charge is limited to peak hours and to all usage within those hours, a TOU rate and peak demand may be significantly effected. If it is applied to customer's based on highest one-hour usage within an hour, it has the effect of shifting costs from customers who have stable homes (large homes) to intermittent usage (apartments). This has been suggested by some rate analysts to recover additional costs from customers who have roof top solar and receive fewer kWh from the grid.
Retail
step down - power is reduced to a lower voltage for use in homes & businesses subtransmission & delivery: delivery and sale of electricity to end users via local lines -retail sales regulated by state. FPA reserves the authority to the states.
Load
the combined demand for electricity placed on the system -used in a generalized sense to denote the aggregate of customer energy usage on the system or in a more specific sense to denote the customer demand at a specific point
price volatility
the degree to which prices change over a given period of time -include magnitude, duration and frequency of price changes
Distribution
the delivery of electricity to end users via low-voltage electric power lines
Distribution
the delivery of electricyt to end-users via low-voltage electric power lines
rates
the prices charged to customers for the energy they consume. these are typically in the form of dollars per kWh (3,760 hours a year)
ratemaking
the process of determining the costs a utility incurs, how much revenue the utility must earn to both cover those costs and earn a profit sufficient to attract investment, and the rates that are charged to the utility's various customer classes
revenue requirement
the total amount of revenue the utility would need to provide a reasonable opportunity to earn a fair rate of return on its investment, given specific assumptions about sales and costs
regulatory lag
time between the period when costs change for a utility and the point when the regulatory commission recognizes these changes by raising or lowering the utility's rates to consumers
rate base
value of all long-lived investments made by a utility to serve its customers, such as buildings, power plants, wires, and office furniture
natural monopoly
● A market that can be served at a lower average cost by a single firm than by two or more firms because of economies of scale. ● Cheaper for a single firm to expand its operation than for additional firms to enter the market due to: ○ High capital intensity → High market entry costs ○ Economies of scale - MC of producing additional units decreases & stays very low over the entire range of production for the market ● Doesn't necessarily mean that only one firm actually is providing the good or service. Rather, it is the assertion about an industry that it is more efficient for one firm (as opposed to multiple firms) to provide a good or service. ● A natural monopoly describes a firm's cost structure (high fixed cost, extremely low constant marginal cost). A monopoly describes market share and market power; the two are not synonymous.
